Front Cover 1
The Microeconomics of Complex Economies 4
Copyright Page 5
Dedication 6
Contents 8
Preface: A Complexity Microeconomics, “Post-Crisis” 10
Economics after 2008 10
Lingering Crises, Increased Socioeconomic Volatility, and the Struggle for Answers 10
Noncomplex Advice for Complex Problems? 11
What Is Neoclassical “Mainstream” Economics—And Does It Still Exist? 12
A “Cognitive Dissonance”? 13
A “Ruling Mainstream” and a “Pluralist” Approach to Teaching 13
Complexity Economics for Complex Problems? The Secular Quest for New Microfoundations 14
The Ideal “Market,” the Real-World Market, Embedded in Its Counter-Principles, and a Mixture of Allocation Mechanisms 14
Nobel Prizes for Such a Microperspective 15
Revising Basic Assumptions, Closing the Gap Between “Doing” and Teaching 16
Toward a Broader Problem Solving … 16
A New Teaching: Redrafting and Recrafting Microeconomics… 16
About This Textbook 17
Guidelines of the Textbook 17
Its Overall Structure and Content 18
Some Points in Particular 18
Its Competition 20
References 21
Acknowledgments 24
About the Authors 26
Didactics: How to Work with This Textbook at Introductory, Intermediate, and Advanced Levels, and in Different Kinds of Courses 28
Beyond the “Economics of the x”: A Different Task, a Different Style 28
Sample Syllabi: Roadmaps for Teaching in Different Formats 29
Prerequisites for Particular Parts 30
Reference 30
List of Abbreviations 32
I: Basics of the Interdependent Economy and Its Processes 34
1 Introduction to the Microeconomics of Complex Economies 36
1.1 Introduction: A Microeconomics of Direct Interdependence 38
1.2 Different Problem Structures in Directly Interdependent Decision Situations 38
1.2.1 Degree of Conflict 38
1.2.2 Rationality and Optimality 38
1.2.3 Pareto Criterion 39
1.2.4 Social Optima and Social Dilemmas 39
1.2.5 Coordination Problems 39
1.3 Competing Paradigms in Economics: Invisible Hand Versus Fallacy of Aggregation 40
1.3.1 The Invisible-Hand World View 40
1.3.2 The Fallacy-of-Aggregation World View 40
1.3.3 A Continuum of Complex Decision Structures 41
1.4 Uncertainty, Strategic Uncertainty, and Bounded Rationality 41
1.4.1 Uncertainty and Expectations 41
1.4.2 Behavioral Patterns 42
1.4.3 Bounded Rationality 42
1.5 Path Dependence, Nonergodicity, and Cumulativity in Processes of Change 43
1.5.1 Path-Dependent and Nonergodic Process 43
1.5.2 Complexity and Cumulative Process 43
1.6 Social Rules as Informational and “Expectational” Devices 44
1.6.1 Social Rules 44
1.6.2 Satisficing 44
1.6.3 Common Knowledge 44
1.6.4 Enabling Action 44
1.6.5 Stable Systems of Interconnected Rules 45
1.7 Social Rules and Social Institutions as Solutions to Coordination and Dilemma Problems 45
1.7.1 Recognizing Different Problem Structures 45
1.7.2 Coordination Problems and Dilemma Problems, Coordination and Cooperation, Rules and Institutions 46
1.7.3 Sacrifice and Sanction, Repeated Interaction and Time Horizon 46
1.7.4 “Common” and “Collective” 47
1.7.5 Costs as Opportunity Costs 47
1.7.6 Incomplete Contracts, Reciprocity, and Trust 47
1.7.7 Transforming and Solving a Social Dilemma 48
1.8 The Public Good Character and Positive External Effects of Social Rules and Social Institutions 48
1.8.1 Types of Goods: Private and Collective 48
1.8.2 Decision Situations and Rules and Institutions as Systems of Externalities 49
1.8.3 Network Externalities and Increasing Returns to Scale of Institutions 50
1.8.4 Degeneration of Institutions and Institutional Lock-In 50
1.8.5 A Variety of Institutional Systems Including “Markets” as Sets of Institutions 50
1.9 “Instrumental” and “Ceremonial” Dimensions of Social Institutions 51
1.9.1 Life Cycle and Degeneration of Institutions 51
1.9.2 Ceremonial Value and Motivation: Power and Status 51
1.9.3 Coordination and Change 52
1.10 Real-World Microeconomics 52
1.10.1 Assessing Different Complex Decision Situations 52
1.10.2 Integrating Direct Interdependence 53
1.10.3 Integrating Uncertainty 53
1.10.4 Reducing Uncertainty in the Corporate World Through Power and Control 53
1.10.5 Integrating Social Rules and Social Institutions 54
1.10.6 Integrating Institutional Change and Petrifaction 54
1.10.7 “Markets” as Widely Differing Sets of Institutions 55
1.10.8 Looking Behind the Veil of Everyday Solutions 55
1.10.9 What is Microeconomics? … and the Next Step 55
Further Reading 55
Further Reading—Online 56
2 Tools I: An Introduction to Game Theory 58
2.1 Introduction 58
2.2 Understanding a Strategic Game 59
2.3 The Invisible Hand and the Fallacy of Aggregation Again 60
2.4 How Not to Play a Game 62
2.4.1 Pareto Dominance 62
Pareto Optimality and Suboptimality 62
2.5 How to Play a Game 62
2.5.1 Dominance 62
2.5.2 Best Answers 63
2.5.3 Nash Equilibria 64
2.6 How Many Games Can We Play? 64
2.7 Summary 64
Chapter References 65
Further Reading 65
Further Reading—Online 65
Exercises 65
3 Problem Structures and Processes in Complex Economies 66
3.1 A Continuum of Social Problem Structures 67
3.1.1 An Invisible Hand at Work: A Social Optimum Structure 67
3.1.2 A Simple Coordination Problem 68
3.1.3 Another Coordination Problem: Assurance 68
3.1.4 Assurance Extended: Stag Hunt and the Problems of Trust and Signaling 69
3.1.5 Coordination with Asymmetric Interests: Battle of the Sexes 70
3.1.6 An Anti-Coordination Problem: Hawk-Dove 71
3.1.7 A Social Dilemma Problem, and Public Goods and Commons 72
3.2 Solutions to Social Dilemma Problems 73
3.2.1 Transformation of the Problem Structure: Supergames and Single-Shot Solution 75
3.2.2 The Population Perspective 81
3.2.3 Agency Mechanisms 82
3.2.4 Institutionalization and Habituation of Cooperative Behavior: Rationally Rule-Behaving 84
Further Reading 87
Further Reading—Online 87
Exercises 87
4 Approaching Real-World Interdependence and Complexity: Empirical Phenomena in the Global Economy 90
4.1 Introduction 92
4.2 The Specific Inherent Complexity, Volatility, and Uncertainty of Today’s Real-World Economy 93
4.2.1 The “Organized Capitalism Plus Welfare State and Proactive Policies,” 1930s Through 1970s: A Shaping Role for Social ... 93
4.2.2 “Market Deregulation” as the “Neoliberal” Response to the Complexity Challenge 95
Politico-Economic Paradigm Change, the Era of “Neoliberal” Deregulation, and its Outcomes 95
Deregulated Markets Are Not a General Cure—on Relevant Real-World Modeling 97
The Global Deregulated Economy in an “Institutional Disequilibrium”? 98
4.2.3 Fragmentation of the VACs and Technological Standardization 99
Spatial and Functional Fragmentation 99
A System of Externalities, Entailing “Inappropriability” 99
A Social Dilemma Involved 100
The Necessity of Technological Compatibility and Behavioral Coordination and Cooperation 100
An Example: Interaction with Service Providers and Customers 101
4.2.4 Digital Information, Competing Network Technologies, and Network Externalities 102
Digital Microelectronic Technologies of Tele-Communication and -Information, and Resulting Network Effects 102
Close-to-Zero Marginal Costs of Information Reproduction 102
Network Technologies and Network Externalities 103
A Game-Theoretic Example: A Three-Agent-Two-Technology Coordination Problem 104
Competing Network Technologies, Uncertainty, and Potential Blockage of Action 106
Incentives to Wait Versus Incentives to be the “First Mover” 106
“Basic Information” as a Collective Good: Sharing Knowledge in Fragmented VACs and on Network-Based Technologies 106
“Inappropriability” and “Open Source” as a Potential New General Economic Principle and as a Business Model 107
4.2.5 Network-Technology Choice as Path-Dependent Process 108
Technology Choice as a Path-Dependent Process: An Example of the Choice of a Computer Operation System 108
The Importance of Path Dependence and Cumulative Process in the Real World: The Case of Microsoft and the Market for PC Ope... 108
4.2.6 Interoperability—Standardization of Technologies and Behaviors, and the Roles of Collective Rationality and Public Po... 110
4.2.7 In All: A “Complexity Challenge” 111
4.3 Individualistic VS. Common and Collective, Strategies to Cope with Complexity 111
4.3.1 Power and Hierarchy, Hub& Spoke Clusters and Networks
“Power-Ization”: Hierarchy, Power, Collusion—Increasing Control to Compensate for Increased Turbulence 111
Hub& Spoke Networks
Hub& Spoke Clusters
4.3.2 Industrial Clusters and Networks in General 113
A Two-Stage Conception of Emergence 113
Clusters Tend to Outgrow the Market 114
More Deliberate Agreements: “Strategic Networks” 115
Open-Source Networks in Particular 115
4.3.3 Taking Stock 115
4.4 Implications of Real-World Complexity for Microeconomic Theory and Modeling 117
4.4.1 A More Integrative Picture 117
4.4.2 What Lies Ahead? The Following Parts of the Book 119
Chapter References 120
Further Reading—Online 124
Exercises 124
II: Markets: General-Equilibrium Theory and Real-World Market Structures 128
5 The Ideal Neoclassical Market and General Equilibrium 130
5.1 Introduction: The Neoclassical Paradigm and Research Program 131
5.2 Consumer Theory 133
5.2.1 Preferences 133
5.2.2 Utility, Maximization, and Demand 135
An Illustration 136
5.2.3 Marshallian Demand, Hicksian Demand, and the Slutsky Equation 138
5.3 Production Theory 139
5.3.1 The Production Function 139
5.3.2 Cost Minimization and Cost Functions 141
5.3.3 Profit Maximization 142
5.4 Partial Equilibrium 144
5.5 General Equilibrium 146
5.5.1 Welfare Theorems and Walras’ Law 146
5.5.2 Existence, Uniqueness, Stability, and the Sonnenschein–Mantel–Debreu Conditions 148
Existence 148
Uniqueness 149
Stability 149
Sonnenschein–Mantel–Debreu 149
5.6 Further Developments 150
5.6.1 Ramsey-Type Intertemporal Optimization 150
Investment 150
Optimization over an Infinite Time Horizon 151
5.6.2 The Ramsey–Cass–Koopmans Growth Model 151
5.6.3 New Classicals and New Keynesians—Microfoundations of Macroeconomics 152
5.7 Extensions and Transitions: The General Theory of the Second Best, Asymmetric Information, and Efficiency Under Imperfe... 154
5.7.1 The General Theory of the Second Best 154
5.7.2 Asymmetric Information—The Markets for Lemons 156
5.7.3 Efficiency and Imperfect Information 158
Externalities and Imperfect Information 159
Chapter References 160
Further Reading—Online 161
Exercises 161
6 Critiques of the Neoclassical “Perfect Market” Economy and Alternative Price Theories 162
6.1 Introduction 163
6.2 The Mistaken Mechanical Analogy 163
6.2.1 Classical Mechanics 164
6.2.2 From Substance to Field 165
6.2.3 The Fall of Classical Physics 166
6.2.4 The Mistaken Energy-Value Analogy 166
6.2.5 The Epistemic Break Between Classical and Neoclassical Economics 168
6.3 Internal Inconsistencies 169
6.3.1 The Impossibility of Horizontal Demand Curves for Individual Firms 169
6.3.2 The Impossibility of Simultaneously Independent Supply and Demand and of Upward-Sloping Supply Curves 170
6.3.3 Summing Up 172
6.4 Preferences and Choice 172
6.4.1 Problems with the “Revealed Preferences” Concept 172
6.4.2 Endogenous Preferences and Conspicuous Behavior 174
Endogenous Preferences 174
Conspicuous Behavior 176
6.4.3 Missing Procedural Aspects of Decision-Making 177
6.5 The Classical Theory of Prices and the Sraffian Critique of the Neoclassical Theory of Value and Price 179
6.5.1 Foundations of the Classical Theory of Prices 179
6.5.2 Sraffian Critique of Neoclassical Theory of Value and Price 180
6.5.3 A Classical One-Commodity Model After Sraffa 181
6.5.4 A Classical N-Commodity Model After Sraffa 182
6.6 An Outlook on Post-Keynesian and Institutional Price Theories: Setting and Administering Prices 183
6.7 Conclusion and Outlook 185
Chapter References 186
Further Reading 187
Further Reading—Online 188
Exercises 188
7 Real-World Markets: Hierarchy, Size, Power, and Oligopoly, Direct Interdependence and Instability 190
7.1 Real-World Phenomena Again, the Corporate Economy, and Oligopolistic Market Structure 191
7.1.1 Spatial Arenas, Deregulation, Complexity and Uncertainty, Coordination and Dilemma Problems 191
7.1.2 Hierarchy, Size Growth, “Power-Ization,” Oligopolistic Structure, and Persistent Industrial Variety 193
7.1.3 Proactive Firm Strategy and Planning—Connecting Hierarchy, Size, Power, and Oligopoly to the Theory of the Firm 193
7.1.4 Overview and Outlook 194
7.2 Factors Leading to Size, Power, and a Small Number of Interdependent Suppliers 195
7.3 Pure Monopoly 196
7.3.1 Price and Output in a Monopoly 197
7.3.2 The Welfare Effect of a Monopoly 200
7.4 Oligopoly 201
7.4.1 Cournot (Cournot–Nash) Oligopoly 202
Monopoly, Cournot–Nash Oligopoly, and Polypoly Prices and Quantities Compared 202
The Cournot–Nash Oligopoly as a Prisoners’ Dilemma—A Numerical Example 203
7.4.2 Bertrand Oligopoly 204
An Extension: Differences in Cost Structures 205
7.4.3 Stackelberg Oligopoly 205
7.5 Natural Monopoly 206
7.5.1 The Rationale for Natural Monopolies 206
7.5.2 Sustainability and Efficiency of the Natural Monopoly in a Contestable Market 207
The Case of Strict Subadditivity 208
The Case of Weak Subadditivity 208
7.5.3 Sustainability and Efficiency of the Natural Monopoly in a Market with Entry Barriers 208
The Case of Strict Subadditivity 208
The Case of Weak Subadditivity 209
7.6 Heterogeneous Oligopoly and Monopolistic Competition 209
7.6.1 From Homogeneous to Heterogeneous Oligopoly and to Monopolistic Competition 209
7.6.2 Sticky Prices in Oligopoly Markets: A Kinked Demand Curve 210
7.6.3 Heterogenization and Monopolistic Competition 210
7.7 Heterogeneous Oligopolistic and Monopolistic Competition: Opportunities for Strategic Behavior of Firms and Their Poten... 214
7.8 A Final Consideration of Firm Size and Power, Strategic Cooperation, Monopolistic Competition, and Real-World Markets 217
Chapter References 218
Further Reading—Online 219
Exercises 219
Solution Keys 219
III: Further Tools and the Analysis of Complex Economies 224
8 Tools II: More Formal Concepts of Game Theory and Evolutionary Game Theory 226
8.1 Introduction 227
8.2 Formal Concepts 228
8.2.1 Games 228
8.2.2 Agents and Decision Making 229
8.3 Concepts from Decision Theory 229
8.3.1 Maximax 230
8.3.2 Maximin and Minimax 230
8.3.3 Laplace Criterion 230
8.3.4 Hurwicz Criterion 230
8.3.5 Savage’s Minimax Regret 231
8.4 Solutions of Normal-Form Games 231
8.4.1 Dominance of Strategies 231
8.4.2 Nash Equilibrium 233
8.4.3 The Relation Between SESDS and Nash Equilibrium 234
8.4.4 Mixed Strategies 234
8.4.5 Nash Equilibrium in Mixed Strategies 235
8.4.6 Computation of the Nash Equilibrium in Mixed Strategies 238
8.4.7 Properties of the Nash Equilibrium in Mixed Strategies 239
8.4.8 Further Refinements: Trembling-Hand Equilibrium and Proper Equilibrium 240
8.5 Extensive Form Games 241
8.5.1 Extensive Form Notation 241
8.5.2 Complete Strategies 242
8.5.3 Backward Induction 242
8.5.4 Subgame Perfectness 243
8.6 Repeated Games 243
8.6.1 Repeated Games and Supergames 243
8.6.2 Rubinstein’s Proof of the Folk Theorem 245
8.7 Population Perspectives and Evolutionary Games 246
8.7.1 Evolutionary Approaches to Game Theory 246
8.7.2 Evolutionary Stability 247
8.7.3 Asymmetry in Evolutionary Game Theory 250
8.7.4 Replicator Dynamics 251
8.8 Rationality in Game Theory 254
8.9 Conclusion 254
Commented Game Theory Textbook References 255
Chapter References 256
Further Reading—Online 257
Exercises 257
List of Symbols 258
9 Tools III: An Introduction to Simulation and Agent-Based Modeling 260
9.1 Introduction 261
9.2 Method 263
9.3 Particular Issues in Computer Simulation 264
9.3.1 Computability 264
9.3.2 Entities 264
9.3.3 Numbers 264
9.3.4 Time 265
9.3.5 Randomness 265
9.3.6 Simplicity 265
9.3.7 Monte Carlo Simulations 266
9.4 Advantages and Disadvantages of Simulation 266
9.5 Microeconomics and Computer Simulation 267
9.5.1 Computer Simulation in Microeconomics 267
9.5.2 Homogeneous Versus Heterogeneous Agents 267
9.5.3 Simulating Games on Networks: The Example of the Prisoners’ Dilemma 268
9.6 Simulation in Practice: An Example 269
9.6.1 Some Preliminary Considerations 269
9.6.2 General Programming Concepts and Python Commands 271
9.6.3 Implementing a Simulation in Python 273
9.7 Outlook 279
Commented Textbook and Introductory Guide Reference 280
Chapter References 280
Further Reading 280
Further Texts on Simulation 280
Simulation Models in Economics 281
Particular Problems of Computer Simulation and Agent-Based Models in Economics 281
Simulation, Economics, and Society 281
Programs, Tools, and Platforms for Computer Simulation 281
Further Reading—Online 281
Exercises 281
10 A Universe of Economies: Interdependence and Complexity, System Trajectories, Chaos, and Self-Organization 284
10.1 Some Basics of Complexity Economics Versus Neoclassical Economics: Topology, Evolutionary Process, and Bounds and Barr... 285
10.1.1 The General Equilibrium Once Again 285
10.1.2 Agents in Real Space: Proximity and Distance, and the Neighborhood Structure 286
10.1.3 Knowledge, Rationality, Time: General Equilibrium and Evolutionary Process 287
10.2 Local and Global Information, the Neoclassical and the Complexity Economics Approaches, and Complex System Dynamics 290
10.2.1 Local and Global Information and Their Implications 290
10.2.2 Dynamics of a Linear System 291
10.2.3 Dynamics of a Nonlinear System 294
10.2.4 Chaotic and Complex Dynamics 295
10.2.5 General Properties of Dynamic Systems 296
10.2.6 Social Systems and Economic Space – A Local- and Direct-Interaction General Equilibrium? 299
10.3 A Quasi-Neoclassical Perfect-Equilibrium Model Based on Global Information and Direct Interdependence 301
10.3.1 An Optimal Lifetime Consumption Problem 302
10.3.2 A Quasi-Neoclassical “Market” with Consumption and Investment 303
10.4 A Policy Solution and the Emergent-Institutions Solution 305
10.4.1 Emergent Institutions with Policy 305
10.4.2 An Evolutionary Solution with Emergent Institutions Again 306
10.5 Conclusion 308
Chapter References 308
Further Reading—Online 309
Exercises 309
11 Dynamics, Complexity, Evolution, and Emergence—The Roles of Game Theory and Simulation Methods 310
11.1 Introduction 311
11.2 The Picture Becomes Complex 312
11.2.1 Increasing Complexity: A Sequence of Models 312
Model Extensions 316
11.2.2 Defining Complexity 317
11.2.3 Complexity in the Sequence of Models 321
11.3 Formal Aspects of Dynamic and Complex Systems 323
11.3.1 Dynamic Systems, Attractors, Ergodicity, Chaos, Path Dependence, and Other Concepts 323
Dynamic Systems 323
Phase Space 323
Trajectories 324
Fixed Points 324
Attractors 325
Limit Cycles 326
Ergodicity and Nonergodicity 326
Deterministic Chaos 326
Phase Transitions and Bifurcations 326
Path Dependence 327
11.3.2 Complex Dynamic Systems 327
11.3.3 Emergence 327
Historic Debates on Emergence and Reductionism 327
Definitions and Conditions of Emergence 328
11.3.4 The Surprised Observer 329
11.3.5 Assessing the Stability of Nonlinear Systems: Linearizing Jacobians 330
11.4 The Origins of Order, Turbulence, and Complexity 332
11.4.1 How Does Complexity Emerge? 332
11.4.2 Fractals, Complexity, and Emergence in the Real World 333
11.5 Modeling Complexity 334
11.6 Why Does it Matter: The Agent’s Struggle with Her Complex Environment 335
11.7 Conclusion 335
Chapter References 335
Further Reading 336
Further Reading—Online 336
Exercises 336
IV: History of Thought and Contemporary Models in Complexity Economics 338
12 Themes of Complexity in the History of Economic Thought: Glimpses at A. Smith, T.B. Veblen, J.A. Schumpeter, and Others 340
12.1 Introduction 342
12.1.1 The Use of Dealing with the History of Economic Thought 342
12.1.2 Complexity in HET: The Example of Unintended Consequences and the Scottish Enlightenment 343
12.1.3 Unintended Consequences Within a System of Emerged Social Institutions, and the Importance of Formal Institutional A... 343
12.2 Adam Smith: The Classical Model of the Origins and Emergence of Institutions, and The Modern Significance of the Class... 345
12.2.1 The Alleged Adam Smith Problem 345
12.2.2 Competing Motives 346
12.2.3 Prisoners’ Dilemma Type Situations 347
12.2.4 Ability of, and Inclination to, Self-Approbation: The Impartial Spectator 348
12.2.5 Recurrent Interaction, Experience, Social Learning, and the Development of an Institution 349
12.2.6 A General Rule as a Positive Institution 351
12.2.7 Some Implications for, and Comparisons with, a Game-Theoretic View 352
12.2.8 Informal Institutions and Formal Institutional Design by the State 353
12.2.9 Socialization, Anti-Conformism, and Prudently Deviating Behavior 354
12.2.10 A Final Remark 354
12.3 Thomas R. Malthus: Introducing Basic Biological Principles—The “Principle of Natural Selection” and the Danger of “Bio... 355
12.4 Karl Marx: Principles of Historical System Evolution, and Collective Action Capacity 357
12.5 Carl Menger: The Early Austrian Individualistic Evolutionary Approach—An Organic Analogy of Market Evolution 358
12.6 Alfred Marshall: “Economic Biology” as the “Mecca” of Economics 360
12.7 Thorstein B. Veblen: The Founding of Evolutionary-Institutional Economics 362
12.8 John M. Keynes: Complex Microfoundations of Macro-Price Level, Interest Rate, and Employment Under Uncertainty–and the... 365
12.8.1 Genuine Macro, with Complex Microfoundations 365
12.8.2 Defanging Keynes’ Impact: A “Neoclassical Synthesis” 366
12.8.3 Rediscovering Keynes’ Microfoundations: Uncertainty, “Animal Spirits,” and Emerging Institutions in Post-Keynesianism … 366
12.8.4 … and the Post-Keynesian Financial Instability Hypothesis 369
12.8.5 Dealing with Keynes’ Legacy: Neo-Keynesian, New Keynesian, and Post-Keynesian 369
12.9 Joseph A. Schumpeter: Complex Process Through “Entrepreneurial” Innovation—Bridging Neoclassical Mainstream and Evolution 370
12.10 Karl Polanyi: The “Market” Economy, the Disembedding of the Market and its Downside 372
12.11 Gunnar Myrdal: Path-Dependent Development of Complex Systems—Circular Cumulative Causation 375
12.12 Herbert A. Simon: Complexity, Bounded Rationality, and “Satisficing” 376
12.13 Nicolas Georgescu-Roegen: The Economy as an Open System, and its Entropy 378
12.14 Karl W. Kapp: Open-Systems Approach, Entropy, and the “Social Costs of Private Enterprise” 380
12.15 Further Contributions to Complexity Microeconomics 383
12.15.1 Further Developing Classical and Marxian Modeling: Piero Sraffa 383
12.15.2 Further Developing Veblenian Evolutionary Institutionalism: John Commons and Clarence Ayres 384
Commons 384
Ayres 385
12.15.3 Further Developing Macroeconomics and Keynesianism: Michal Kalecki, Nicholas Kaldor, Luigi Pasinetti, Richard Goodw... 385
Kalecki 385
Kaldor 386
Pasinetti 387
Goodwin 387
Minsky 387
12.15.4 Developing Neoclassical Economics into Greater Complexity: Vilfredo Pareto 388
12.16 Clustering Economists in Diverse Economic Paradigms, and a Final Remark 389
Chapter References 390
Further Reading 393
Further Reading—Online 394
Exercises 394
Early Scottish Classical Economics and Adam Smith 394
Early Evolutionary Understandings in Post-Smithian and “Darwinian” Economics 394
Veblen, Keynes, Schumpeter 394
Post-Veblenian Evolutionary-Institutional and Ecological Economics 395
Solution Keys 395
13 Recent Core Models of Complexity Microeconomics 396
13.1 Introduction 398
13.2 A. Sen (1967) on the Isolation Paradox and Assurance Game, and the Importance of the Future 398
13.3 13.3 A. Achotter (1981), R. Axelrod (1984/2006), and k. Lindgren (1997) on the Emergence of Institutions 401
13.3.1 Schotter 401
13.3.2 Axelrod 404
13.3.3 Lindgren 405
13.4 T.C. Schelling (1978) and R. Axelrod (1984/2006) on Segregation 406
13.4.1 A Spatial Proximity Model 406
13.4.2 A Bounded-Neighborhood Model 408
13.4.3 A Territoriality Model 409
13.5 13.5 T.C. Schelling (1978) and W.b. Arthur (1994) on Attendance Coordination 410
13.5.1 Schelling: Simple Attendance Dynamics 410
Minimum Attendance 410
Interdependent Attendance Decisions 410
The Dynamics of Attendance 410
Alternative Expectation/Attendance Relations 411
13.5.2 Arthur: The El Farol Bar Problem 412
13.6 13.6 W.B. Arthur et al. (1982), W.B. Arthur (1989), and P.A. David (1985) on Increasing Returns, Positive Feedback in Technology Choice Processes, and Lock-In 414
13.6.1 Standardization and Technology Choice in Economic Systems 414
13.6.2 A Formal Model of Technology Choice and Lock-In 415
13.7 R.W. Cooper and A. John (1988) on Synergies and Coordination Failures 417
13.8 R.R. Nelson and S.G. Winter (1974, 1982) on the Evolutionary Theory of Economic Change 419
13.8.1 Evolutionary Approaches to Economics 419
13.8.2 An Evolutionary Approach to the Theory of the Firm 420
13.8.3 An Evolutionary Growth Model 421
13.9 S.A. Kauffman (1993) on Search on Fitness Landscapes 424
13.9.1 Illustrative Example 424
13.9.2 NK Landscapes 425
13.9.3 Fitness Levels 426
13.9.4 Search 426
13.10 D.J. Watts and S.H. Strogatz (1998) on Small-World Networks 427
13.10.1 The Small-World Phenomenon 428
13.10.2 Formalization of the Small-World Phenomenon 428
13.10.3 Properties of Small-World Networks 430
13.11 A.-L. Barabási and R. Albert (1999) on Scale-Free Networks 430
13.11.1 The Distribution of Node Degrees 430
13.11.2 A Model of Network Growth 431
13.11.3 Scale-Free Networks, Small-World Networks, and the Real World 432
13.12 The Veblenian Evolutionary-Institutionalist Model of Institutional Change (P.D. Bush, 1987) 433
13.12.1 Veblenian Evolutionary Institutionalism Today 433
13.12.2 The Institutionalist Definition of Institutions 435
13.12.3 Values Correlating Patterns of Behavior 436
13.12.4 The Asymmetry in the Institutional Dichotomy, Ceremonial Dominance, and Ceremonial Encapsulation 436
13.12.5 A Reflection of Ceremonial Dominance and Encapsulation: The Degeneration of Instrumental Institutions into Ceremoni... 439
The Different Benchmarks: The Institution as Enabler Versus Ceremonial Dominance 439
Degeneration of an Instrumentally Warranted Institution in a Hierarchical Environment: The Career Motive and the Motive of ... 440
Another Ceremonial Motive, Value, and Warrant: “Institutional Economies of Scale”—from an Instrumental Institution to a Cer... 441
13.12.6 The Process and Forms of Institutional Change 443
13.12.7 The Discretionary Character of Progressive Institutional Change: A Policy Perspective 445
13.13 E. Ostrom (1990) and E. Ostrom et al. (1992) on the Governance of Common Pool Resources 445
13.13.1 General 445
13.13.2 The Model 446
13.13.3 The Lab Experiments 447
Chapter References 449
Further Reading—Online 451
14 The Size Dimension of Complex Economies—Towards a Meso-Economics: The Size of Interaction Arenas and the Emergence of Me... 452
14.1 Introduction: Why Agents Might Rationally Strive for Smaller Structures 454
14.2 Terms and Overview 455
14.2.1 Expectations 455
14.2.2 Agency Capabilities 455
14.2.3 Expectations in Meso-Sized Groups 455
14.2.4 Exhaustion of Cooperative Advantage 455
14.2.5 A Maximum Critical Mass 455
14.2.6 Manifold Applications 456
14.2.7 Incomplete Information, Lacking Adaptive and Learning Pressure, and Other Caveats 457
14.2.8 The Danger of Strong Ties, Lock-In, and the Potential Degeneration of Institutions 458
14.2.9 Break-Out from Lock-In: From Analysis to Application and Political Design 458
14.2.10 Micro-to-Macro Aggregation or Meso Emergence?—the Systematic Place of Meso 458
14.3 Size and Meso-Size of Populations and Groups in the Literature 459
14.3.1 Ontological Foundation of “Meso” 459
14.3.2 A Causal-Genetic Approach 459
14.3.3 Theoretical and Methodological Literature So Far 459
14.4 The Ubiquity of the Dilemma Problem and Emergent Structure Again 463
14.4.1 A Ubiquitous Everyday Problem Embedding Every Single and Simple Transaction 463
14.4.2 Dominant Incentives to Free Ride or Exploit—Technology Choice and Innovation in the Value-Added Chain 463
14.4.3 Collective-Good Character of Basic Information 463
14.4.4 Proper Institutionalized Problem Solving and Other Solutions in Reality 464
14.4.5 Degeneration of Problem-Solving Institutions and the “Social Surface” 464
14.4.6 Complexity and Market Failure 464
14.4.7 Habituation 464
14.4.8 Micro-Foundation of Macro- and Meso-Emergence 465
14.4.9 Basic Rules of the Game, Common Culture, Beliefs, and Agency Capacities… 465
14.4.10 … and the Resulting Complex Process—and Changes It Will Trigger 465
14.5 A Stochastic Element, the Population Perspective, and the Minimum Critical Mass Again 466
14.6 Adapting Group Size: Agency Mechanisms 467
14.6.1 Expectations 467
14.6.2 Memory and Monitoring 467
14.6.3 Reputation Chains 467
14.6.4 Partner Selection and a Maximum Critical Mass Smaller Than the Whole Population 468
Selection by Distance/Proximity/Neighborhood 468
Agency Capacity in Theory and Lab Experiments 468
Building Peer Groups 468
Improving Cooperators’ Outcomes 468
Overlapping of Individual Selected Peer Groups 469
More Generally: Net Externalities, Synergies, Cumulative Learning in Economics 469
14.6.5 Revisiting and Expanding the Population Perspective 470
Agency Mechanisms and Partner Selection 470
Institutions Do Carry Some Share of Defectors or Defecting Actions 471
A Mixed Strategy Equilibrium 471
14.7 An Empirical Application: High General Trust and High Macro-Performance in Meso-Structured Economies—an Explanation of... 472
14.7.1 Generalization from Expectations to Contextual and General Trust 472
14.7.2 High Levels of General Trust and Macro-Performance in Countries with Inner Meso-Structure 473
14.8 Conclusion: Toward Meso-Economics 475
Chapter References 476
Further Reading—Online 480
V: Further Applications: Information, Innovation, Policy, and Methodology 482
15 The Information Economy and the Open-Source Principle 484
15.1 Introduction 485
15.2 The Economics of Information, Knowledge, and Software 487
15.2.1 Data, Information, and Knowledge as Club Goods 487
15.2.2 Network Goods, Network Technologies, and Network Externalities 488
15.2.3 The Resulting Social Dilemma 489
15.2.4 The Strategy Space in Industries with Network Externalities 491
Size Effects and Price Wars 491
Compatibility (Interoperability) and Incompatibility 493
Controlling a Sector, Planned Obsolescence, and Refusal to Innovate 493
Tied Standards 494
Two-Sided Networks 494
Profitable Piracy 495
Niche Construction 496
Open Source as a Business Strategy 496
15.3 The Economics of Open Source 497
15.3.1 Open Source in Practice 497
15.3.2 Open Source in Theory 498
15.3.3 Open Source in Reality 499
15.3.4 Open Source Everywhere 500
15.4 Policy in the Weightless Economy: Intellectual Property Rights, Open Standards, and Other Issues 501
15.4.1 Intellectual Property Rights 501
Openness 501
Network Externalities 501
Size Is Power 502
Path Dependence 502
15.5 Conclusion 502
Chapter References 503
Further Reading 504
Further Reading—Online 504
Exercises 504
16 Networks and Innovation—The Networked Firm, Innovation Systems, and Varieties of Capitalism 506
16.1 Overview 507
16.2 Towards a Complexity-Based Understanding of Innovation 509
16.3 Firms in Clusters and Networks—An Organizational Triangle 512
16.3.1 Transaction Costs and Market Versus Hierarchy Optimization 512
16.3.2 The Networked Firm 513
16.3.3 The Organizational Triangle 514
16.3.4 The Instrumental and Ceremonial Aspects of the Institutionalized Network Dimension 516
16.4 National Innovation Systems 518
16.4.1 Understanding Economies and Their Potential as a Function of Their Institutional Framework 519
16.4.2 Innovation Processes in Complex Environments 519
16.4.3 Perspectives on Policy 520
16.5 Endogenous Development Theory 521
16.5.1 Foundations of the Concept 521
16.5.2 Four Main Focuses—Firms, Flexibility, Cities, and Institutions 521
16.5.3 Policy Focus and Implications 523
16.6 Varieties of Capitalism 523
16.6.1 Beyond the Predominant Understandings of Institutions at the Time 523
16.6.2 Institutional Influence and Strategic Interactions 524
16.6.3 LMEs and CMEs 525
16.6.4 Beyond the Market-Hierarchy Dichotomy 525
16.6.5 Consequences for Production Structures in Different Economies 527
16.6.6 Challenges and Focuses for Policy Makers 527
16.6.7 VoC and (the Challenges of) Globalization 528
16.6.8 Some Extensions and Basic Critique of the VoC Concept 529
16.7 Chapter Conclusion: Main Aspects of the Above Concepts 530
Chapter References 531
Further Reading—Online 531
17 Policy Implications: New Policy Perspectives for Private Agents, Networks, Network Consultants, and Public Policy Agencies 532
17.1 Policy Implications of Complexity (Micro-) Economics 534
17.1.1 The Flawed Neoclassical Mainstream Benchmark: “Second Best” or “Worst,” and a New Basic Policy Perspective 534
17.1.2 The Complexity of Economic Systems, and a Systemic Approach to Policy 534
A Minimum Complexity of a Controlling Policy System 535
Collective Rationality: Social-Choice Versus Procedural, Discourse, and Substantial Conceptions of Democracy 536
A Systemic, Experience- and Learning-Based, Nonmyopic Policy Approach 536
17.1.3 Further “Complexity Hints for Economic Policy” 537
17.2 Interactive and Institutional Economic Policy: A Lean Policy Approach for a Complex, Interactive, and Evolutionary Eco... 538
17.2.1 “Self-Organization” of Systems—And a Role for Social Evaluation, “Meritorization,” and Policy 538
A Solution Possible … 538
… But Uncertain and Fragile 539
A Social Evaluation, and “Meritorization” Criteria 539
17.2.2 The Typical Economic Problem, and a New Private–Public Interrelation 540
Typical (Macro-) Economic Problems as Individualistic Cooperation Failure (Market Failure) in Complex Economies 540
A New Private–Public Interrelation Defined 541
Making Use of the Interests of the Private Agents in the Collective Good 542
Starting Points of a New Policy Perspective 543
17.2.3 “Meritorics” for a Negotiated Economy and for an Instrumental Institutional Emergence 543
17.2.4 General Implications 546
A Paradigm Change Toward a Leaner Policy 546
Meso-Economics and Structural (Regional and Industrial) Policies as New Focuses 547
17.2.5 The Axelrodian Policy Model: A Basic PD-Informed Interactive/Institutional Economic Policy and a Related Instrumentation 547
A General View Based on the Single-Shot Inequality 547
Instruments I: Rewarding Cooperation 549
Instruments II: Enlarging the “Shadow of the Future” 549
A Policy Approach for Different Types of Policy Agents 549
17.2.6 Further Game-Theoretically Informed Policy Issues 550
17.3 Policy Implications for Information and Innovation in Firms, Networks, and Open-Source Communities 553
17.3.1 Policies to Realize the Potentials of Existing Knowledge: Moderating “Property Rights” and Developing Openness as a ... 554
Intellectual Property Rights and Openness 554
A Critical Political Time Window for Technological-Openness and Antimonopoly Strategies 555
17.3.2 Perspectives on Innovation and Development Policies 555
Innovation Policies 555
Endogenous Development Policies, Local and National 556
17.4 Final Conclusions 557
Chapter References 558
Further Reading—Online 560
18 How to Deal with Knowledge of Complexity Microeconomics: Theories, Empirics, Applications, and Actions 562
18.1 What Is Scientific Knowledge? 563
18.1.1 Scientific Systems: Models, Theories, Approaches 563
Mathematical Models 563
Theories and Approaches 564
18.1.2 Pattern Modeling and Case Studies as Method 564
18.1.3 Scientific Systems and Reality: Is Strict Testing Possible? 565
18.2 Positivism and Critical Rationalism 566
18.3 Model Platonism: The Immunizing Epistemological Practice of Mainstream Economics Under Scrutiny 566
18.3.1 The Axiomatic Method and the Original Criticism 566
18.3.2 Econometric Testing and Meta-Regressions … 567
18.3.3 … and Publication Biases 567
18.3.4 Replicability of Results and Data Transparency—Toward a New Academic Ethics 568
18.3.5 The Model Platonism Critique Then and Now 569
18.4 From “if” to “as if”: Milton Friedman and Methodological Instrumentalism 569
18.4.1 Friedman: Logical Positivism, Eternal Laws, and “Good Predictions” 569
18.4.2 Critiques: Assumptions, Predictions, and Strict Testing 570
18.5 Emulating Wrong Ideals: The McCloskey Critique of the Rhetoric of Economics 571
18.6 Critical Rationalism Versus Paradigms 573
18.6.1 Modern Measurement Theory and the Duhem–Quine Thesis 573
18.6.2 Scientific Systems as Paradigms, and Scientific Revolutions 574
18.7 Critical Realism 575
18.8 Reality, “Realism,” and Constructivism 577
18.9 Epistemological Pluralism 578
18.10 Further “Applying” Your Knowledge on Complex Economies: Action and Experience, Enlarging Rather Than Consuming Knowle... 580
18.10.1 Policies in a Broad Understanding 580
18.10.2 Knowledge, Expanding, and Transforming 581
18.11 A Final “Application”: Governance for the Res Publica, and Policy 582
Chapter References 582
Further Reading—Online 584
Index 586